State Supreme Court to tackle tax dispute over wireless retailer’s prepaid cards

Tim Parkinson, CC BY 2.0, via Wikimedia Commons

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  • The North Carolina Supreme Court will decided in the months ahead whether a cell phone retailer was required to collect sales tax on prepaid cards sold between 2016 and 2018.
  • The state Revenue Department argues that Wireless Center of NC, a Boost Mobile retailer, owes more than $516,000 in unpaid taxes and penalties.
  • Wireless Center lawyers argue the cards should not be subject to sales tax since customers can use the cards to purchase both taxable and nontaxable items.

The North Carolina Supreme Court will decide in the months ahead whether a cell phone retailer should have collected sales tax on its prepaid cards from 2016 through 2018.

The dispute involves more than $516,000 in unpaid taxes and penalties.

Wireless Center of NC argues that its cards should have been free from state sales tax. During the period covered in the lawsuit, the company operated six stores selling Boost Mobile products and services in Greensboro, Winston-Salem, and Monroe.

The state Revenue Department argues that state law required Wireless Center to collect sales tax on the cards.

The state Office of Administrative Hearings sided with Wireless Center in May 2022, but the North Carolina Business Court ruled in favor of the Revenue Department in June 2023.

“After the Prepaid Cards were added to a customer’s Boost Mobile Account, the customer could then use the stored value to purchase a variety of goods and services, some of which were subject to sales tax and some of which were not,” the company’s lawyers wrote in December. “Among the products and services that the Prepaid Cards could be used to purchase was prepaid wireless calling service which are subject to sales tax and Internet access services which are not subject to sales tax.”

“The Department’s theory was that because the stored value provided the customer with the right to purchase prepaid wireless calling service, which is subject to sales tax upon purchase, the entire amount of the Prepaid Card was subject to sales tax, notwithstanding that it could have been used to purchase goods and services that were not subject to sales tax,” Wireless Center’s state Supreme Court brief continued.

The Revenue Department’s lawyers responded in February. Revenue officials label the prepaid cards “real-time replenishments of airtime units,” or RTRs. The department also refers to state law regarding “prepaid wireless calling service.”

“Wireless Center appears to conflate a customer’s purchase of the ‘right that authorizes purchase of mobile telecommunications service’ with a customer’s use (redemption) of that right,” wrote state Justice Department lawyers representing the Revenue Department. “Based on this mistaken identification, Wireless Center has concluded that RTR is not a taxable product but is more akin to a gift card and should be taxed as a gift card – at the point of use rather than at the point of sale.”

“The fundamental flaw with this premise is that, under North Carolina law, PWCS is taxed at the point of sale instead of the point of use,” state lawyers added. “As such, since RTR is a PWCS, it is properly taxed at the point of sale – when the customer purchases the ‘right’ from Wireless Center.”

In its latest court filing Friday, Wireless Center replied to the Revenue Department’s brief.

“In summary, the Department argues that Wireless Center’s Prepaid Cards (or RTRs as the Department refers to them) must be ‘prepaid wireless calling service’ (‘PWCS’) because PWCS is subject to sales tax and Wireless Center’s sales must be taxable. The position is circular and avoids the question before the Court: do Prepaid Cards fall within the plain language definition of PWCS?” Wireless Center’s lawyers wrote.

Prepaid wireless service offerings “have changed significantly” since 2007, when the General Assembly adopted the laws at issue in the legal dispute.

“In the intervening years, the demand and the market for mobile telecommunications services changed yet the statutes have largely remained unchanged,” Wireless Center’s lawyers wrote. “The Department insists on putting a round peg (the statute) in a square hole (new offerings and technology), even if that means subjecting North Carolinians to sales tax twice on the same dollar and assessing North Carolina sales tax on unquestionably exempt purchases.”

“Contrary to the Department’s arguments, wireless service providers are not rewriting tax law to change the ‘taxable nature’ of a product by offering different products to satisfy consumer demand. Instead, wireless service providers, through originators such as Wireless Center, offer products and services that are not PWCS,” the brief continued.

“Unlike PWCS, the Prepaid Cards at issue here represent a credit to a customer’s Boost Mobile account, which can now be used to purchase plans and other products and services that are not PWCS or otherwise taxable.”

The state Supreme Court has not yet scheduled the case, North Carolina Department of Revenue v. Wireless Center of NC, for oral argument.